IGCSE Accounting 0452 - 5.5 Manufacturing Accounts - Work in Progress

Objective

Understand and make adjustments for work in progress.

What is Work in Progress (WIP)?

Work in Progress (WIP) represents the value of goods that are currently in the production process but are not yet finished. It includes the cost of materials, labour, and overheads incurred up to the point of completion.

WIP is a crucial element in manufacturing accounts as it reflects the ongoing production activities and the costs associated with them.

Why is WIP Important?

Accurately tracking WIP is essential for:

• Determining the cost of goods manufactured.
• Providing a clear picture of the company's current production status.
• Assessing the efficiency of the production process.

Calculating Work in Progress

The calculation of WIP involves summing the costs incurred up to a specific point in time. This includes:

• Direct Materials Used: The cost of raw materials that have been directly used in the production of goods.
• Direct Labour: The wages and salaries of workers directly involved in the manufacturing process.
• Manufacturing Overheads: Indirect costs associated with the production process, such as factory rent, utilities, and depreciation of factory equipment.

WIP = Beginning WIP + Direct Materials Used + Direct Labour + Manufacturing Overheads - Cost of Goods Completed and Transferred

Adjustments for Work in Progress

At the end of an accounting period (e.g., a year), it's necessary to make adjustments to the WIP account to determine the value of goods completed and transferred to finished goods inventory.

The key adjustment is the Cost of Goods Completed and Transferred. This represents the total cost of the goods that have finished production and are ready for sale.

The calculation for this adjustment is:

$$ \text{Cost of Goods Completed and Transferred} = \text{Beginning WIP} + \text{Direct Materials Used} + \text{Direct Labour} + \text{Manufacturing Overheads} - \text{Ending WIP} $$

Where Ending WIP is the value of goods currently in production at the end of the period.

Manufacturing Accounts - Example

Consider the following information for a manufacturing company:

Item	Amount (£)
Beginning Work in Progress	$12,000
Direct Materials Used	$25,000
Direct Labour	$18,000
Manufacturing Overheads	$10,000
Ending Work in Progress	$15,000

Calculation of Cost of Goods Completed and Transferred:

$$ \text{Cost of Goods Completed and Transferred} = 12,000 + 25,000 + 18,000 + 10,000 - 15,000 = 40,000 $$

This means that $40,000 worth of goods were completed and transferred to finished goods inventory during the period.

Impact on Manufacturing Accounts

The adjustments for WIP directly impact the manufacturing accounts:

• Manufacturing Cost Account: The cost of goods completed and transferred is debited to the manufacturing cost account.
• Work in Progress Account: The ending WIP balance is carried forward to the next accounting period.